Optimal split of orders across liquidity pools: a stochastic algorithm approach

DOI10.1137/090780596MaRDI QIDQ5388695zbMATH OpenOpenAlexFDO

Authors Sophie Laruelle, Charles-Albert Lehalle, Gilles Pagès

Publication date 19 April 2012

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0910.1166

zbMATH Keywords

asset allocationmarket impactmonotone dynamic systemsreinforcement principlestochastic approximationstochastic Lagrangian algorithm

Mathematics Subject Classification ID

Central limit and other weak theorems (60F05) Stochastic approximation (62L20) Applications of statistics to actuarial sciences and financial mathematics (62P05)

Abstract: Evolutions of the trading landscape lead to the capability to exchange the same financial instrument on different venues. Because of liquidity issues, the trading firms split large orders across several trading destinations to optimize their execution. To solve this problem we devised two stochastic recursive learning procedures which adjust the proportions of the order to be sent to the different venues, one based on an optimization principle, the other on some reinforcement ideas. Both procedures are investigated from a theoretical point of view: we prove a.s. convergence of the optimization algorithm under some light ergodic (or "averaging") assumption on the input data process. No Markov property is needed. When the inputs are i.i.d. we show that the convergence rate is ruled by a Central Limit Theorem. Finally, the mutual performances of both algorithms are compared on simulated and real data with respect to an "oracle" strategy devised by an "insider" who knows a priori the executed quantities by every venues.

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Cited in

(16)

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• Order scoring, bandit learning and order cancellations
• Optimal posting price of limit orders: learning by trading
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• Efficiency of the price formation process in presence of high frequency participants: a mean field game analysis
• Market making and portfolio liquidation under uncertainty
• Transform analysis for Hawkes processes with applications in dark pool trading
• Optimal execution in Hong Kong given a market-on-close benchmark
• Optimal order placement in limit order markets
• Multi-asset optimal execution and statistical arbitrage strategies under Ornstein-Uhlenbeck dynamics
• On Stochastic Gradient Langevin Dynamics with Dependent Data Streams: The Fully Nonconvex Case
• Real-time market microstructure analysis: online transaction cost analysis
• General intensity shapes in optimal liquidation
• Portfolio liquidation in dark pools in continuous time
• Price manipulation in a market impact model with dark pool

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